Preserving Social Security for the next 75 years without reducing any projected benefits would require an immediate and permanent 3.4 percent payroll tax increase, the Congressional Budget Office said Tuesday in a new report looking at long-term budget challenges that shows there are no easy options left.
The new CBO projections show that spending is on pace to be 26.2 percent of the economy in 25 years — up from about 21 percent now — and powered by a sharp rise in expected interest rates.
In the short term, the picture is somewhat better. Deficits will bottom out at $378 billion in 2015, as long as Congress and President Obama leave this year’s spending cuts and tax increases in place. But they will begin to rise again after that.
Much of the grim picture is the result of the tax deal Mr. Obama and Congress struck at the beginning of this year, which let payroll tax rates rise across the board and saw income tax rates rise for the wealthiest, but permanently lowered the income rates on most Americans.
That changed projections dramatically, the CBO said: Debt, which just last year was projected to drop to 52 percent of gross domestic product over 25 years, now will be 100 percent of GDP in 2038 — nearly twice what it was supposed to be.
“Under the extended baseline, budget deficits would rise steadily and, by 2038, would push federal debt held by the public close to the percentage of GDP seen just after World War II — even without factoring in the harm that growing debt would cause to the economy,” the CBO said.
The agency, which is the nonpartisan scorekeeper for the government, said that, under current law, tax rates are already projected to rise to 19.7 percent of GDP, which is significantly above the historical average of recent decades.
In 2013, taxes will be about 17 percent of GDP while spending will be 20.8 percent of GDP, leaving a deficit nearly 4 percent of the size of the economy, or somewhere near $650 billion.
By 2023 spending will have grown to 21.8 percent of GDP while taxes will have risen to 18.5 percent, shrinking deficits slightly. But over the following 15 years, even as taxes rise to 19.7 percent of the economy, spending will grow much faster, reaching a stunning 26.2 percent of GDP.